Authors

Neil Williams

Senior Economic Adviser

Neil joined Hermes in August 2009 and is responsible for Hermes’ economic research. He has a forward-looking approach to generate investment strategy ideas. Neil adopts top-down methods – macro and market analysis to identify interest rate and credit value, and sovereign default risk. Neil began his career in 1987 at the Confederation of British Industry (CBI), becoming its youngest ever Head of Economic Policy. He went on to hold a number of senior positions in investment banks – including Director of Bond Research at UBS, Head of Research at Sumitomo International, Global Head of Emerging Markets Research at PaineWebber International, and, before coming to Hermes, Head of Sovereign Research and Strategy at Mizuho International. Neil has 30 years’ industry experience and earned an MA in Economics in 1986 from Manchester University, having the previous year completed his BSc (Hons), also in Economics, from University College Swansea.

In his latest quarterly Economic Outlook, Neil Williams, Group Chief Economist at Hermes Investment Management, points out that ten years after the first glimpse of the financial crisis, and major economies have finally recouped their GDP (Chart 1, below). Even Japan, whose deflationary crisis originated two decades earlier and Italy, hamstrung by the euro, are back to ‘square one’. Arguably, most of the macro effects from the crisis were not registered till 2008, which then triggered a round of monetary stimulus – conventional and unorthodox – unparalleled since the 1930s.

Ten years after the first glimpse of crisis, &amp; major economies have recouped their GDP. But, despite ‘muscle flexing’, the road to policy normalisation will be long &amp; slow, with the prospect of another two years of negative real rates in the US, UK, Japan, &amp; euro-zone. Our analysis suggests that by sustaining its QT programme, the US Fed could ‘take out’ as much as 130bp of further rate hikes by 2019. US rates, when they peak, should be far lower than we’re used to.

As the world wakes up to the new reality of extremely slow growth, there seems little doubt the returns investors became accustomed to during the ‘Great Moderation’ are a thing of the past, according to Saker Nusseibeh, Chief Executive of Hermes Investment Management. We believe investors will need to adjust expectations downwards across almost all asset classes in the future, with real returns of 4-5% not unimaginable. Real yields on government debt may struggle to exceed 1-2% at the same time. While investors can receive a premium for corporate instruments, these are likely to experience rising default levels.

In his May issue of Ahead of the Curve, Neil Williams, Group Chief Economist at Hermes Investment Management, discusses his view that while markets are still taking a ‘glass-half-full view’ of the world, protectionism is the new risk emerging. This he argues, suggests we face a year of two halves – where stimulus-euphoria gradually gives way to stagflation concern. Helpfully, though, the trade-off is that central bank policy rates stay lower than many expect. Amid this, the US Federal Reserve remains the test case for whether central banks can ever ‘normalise’ policy interest rates. We expect it to try, but fail – peaking out at a far lower policy rate (1¼-1½%) than in past US recoveries.

Neil Williams, Group Chief Economist at Hermes Investment Management, sets out his reaction to today’s Spring Budget: Having set out his stall in November and still awaiting the main event – our Brexit negotiations - the chancellor’s fiscal tweaks today were never going to raise too many eyebrows. Sterling’s fall since the Brexit vote has so far cushioned the economic blow, allowing him a sunnier growth outlook for this year, and more optimistic tax-take.

After Theresa May’s explanation of the Brexit process and The Supreme Court ruling, the UK’s intended departure date and destination look clearer. But, in his latest Ahead of the Curve monthly, Neil Williams, Group Chief Economist at Hermes Investment Management, believes the largest uncertainty now is the length of the journey ahead. Our negotiations, he argues, could stretch well beyond the two years assumed by Article 50.

Explanation of the Brexit process &amp; The Supreme Court ruling have made the UK’s departure date &amp; destination clearer. But, the largest uncertainty now is probably the length of the journey ahead. Our negotiations could stretch well beyond the two years assumed by Article 50. Maintaining access to, rather than full membership of, the customs union looks nearest to Canada’s model. But, this took seven years, &amp; ours may have to be even more ambitious.

The ECB’s decision prior to Christmas to extend QE for another nine months to December 2017, though ‘taper’ it from this April, does not herald an early tightening of economic policy, according to Group Chief Economist Neil Williams in his January Ahead of the Curve. Quite the opposite in fact, with the key deposit rate likely to stay negative in 2017, and the fiscal side activated.
2017’s extra QE easily surpasses the combined GDPs of Greece & Portugal...
Tapering means more QE. By tapering its monthly asset purchases from €80bn to €60bn, it’s still looking to inject an extra €540bn in QE. This easily surpasses the combined GDPs of Greece and Portugal. Central banks can now buy bonds that yield lower than the -0.4% deposit rate.
However, the nuance, is Mr Draghi’s growing encouragement of governments to take the baton back from the ECB. A lesson from Japan is that QE provides cash to lend, but cannot force consumers and firms to borrow. The euro-zone thus looks halfway down the Japan route. It too may be running unconventionally loose monetary policy (QE and negative rates) to get its currency down, but has yet to let go of the fiscal reins.

Neil Williams, Group Chief Economist: Today’s US Fed rate hike, to 0.75%, was so well telegraphed it should be largely ‘baked into’ asset prices. The move confirms the Fed will remain the test case for whether any central bank can ‘normalise’ rates. We expect it to try, but fail, with the funds target peaking out in 2017 at just 1% – way lower than the near 3% in the Fed’s own ‘dot plot’ rate assumptions. Admittedly, monetary policy in 2017 will play second fiddle to politics, once Mr Trump’s new administration gets its feet under the table in January. But, even the volatility that could accompany a Trump-led paradigm shift does not point to an aggressive Fed.

Some today will be disappointed that Mr Draghi is planning to taper the ECB’s QE from next April. But Neil Williams, Group Chief Economist at Hermes Investment Management, believes they shouldn’t be. First, tapering means more, not less, QE, and even though he’s closing the tap a notch in April, the ECB’s liquidity sink is still filling up. By tapering its monthly asset purchases from €80bn down to €60bn, he is still looking to inject an extra €540bn in QE. To put this into perspective, this easily surpasses in equivalent terms, the combined GDPs of Greece and Portugal for example.

In his latest quarterly Economic Outlook, Looking into 2017, Neil Williams, Group Chief Economist at Hermes Investment Management, sets out the six core beliefs that lie behind his macro view of 2017. After a year of political surprises, we could see tectonic shifts in economic policy. Speculation, rightly, that major economies will open their fiscal box is currently causing ‘reflation trades’ to puff up growth assets, raise inflation expectations, and make the 30-year bull-run in government bonds look even staler.